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Foreign Aid and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy
Author:
Stephen J. Turnovsky null

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Serpil Tekin null

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, and
Ms. Valerie Cerra
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Series:
IMF Working Papers
Volume/Issue:
Volume 2008: Issue 204
Language:
English
Publication Date:
01 Aug 2008
DOI:
https://doi.org/10.5089/9781451870626.001
ISBN:
9781451870626
ISSN:
1018-5941
Pages:
45
Keywords:
WP; mover accent; capital stock
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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A dynamic dependent-economy model is developed to investigate the role of the real exchange rate in determining the effects of foreign aid. If capital is perfectly mobile between sectors, untied aid has no longrun impact on the real exchange rate. A decline in the traded sector occurs because aid, being denominated in traded output, substitutes for exports in financing imports. While untied aid causes short-run real exchange appreciation, this response is very temporary and negligibly small. Tied aid, by influencing sectoral productivity, does generate permanent relative price effects. The analysis, which employs extensive numerical simulations, emphasizes the tradeoffs between real exchange adjustments, long-run capital accumulation, and economic welfare, associated with alternative forms of foreign aid.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund